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James Dunn: I'm speaking with Reece Birtles Chief investment officer, Martin Currie Australia, part of the Franklin Templeton Group, but Martin Currie is soon to be rebranded Clearbridge. Reece, first of all, it's a great pleasure to have you participating in the Inside Networks Equities and Growth Symposium.
Reece Birtles: Thanks, James. Yes, we're rebranding to Clearbridge, which for us is a bit of returning home because we were JP Morgan Investment Management in Australia in the 90s and we were sold to Solomon Smith Barney, which is today Clearbridge. So we know all the guys and looking forward to it.
James Dunn: Now, Reece, let's cut to the chase. Markets very, very turbulent at the time we're speaking, big draw downs in the indices and as a value manager, this must be the time that you (and) your team really lives for. This is the time to to do some good.
Reece Birtles: Yep, I mean, it's, it's sort of amazing. We're long term investors, you know, we're really looking at the fundamentals and what are stocks worth over it's, you know, discounted cash flow life of 20 years, but we're always assessing the current price against that long term value. And when you get volatile markets, that's when the opportunities and the distortions in pricing compared to fair value really open up and not all stocks behave the same in that time. So we tend to find that our turnover in our portfolios might be 20% in most years, and then you get these sort of distortions.
We might do 60% turnover in a year, and it's that turnover that really creates excess value for in terms of alpha.
James Dunn: An amazing amount of froth can come out of markets really quickly, Can't it?
Reece Birtles: It, it can. I mean, we look at the Australian market and you know, we did think it was overvalued coming into this. But nothing like the US. You know, we'd say that the, the Australian market was probably 15% overvalued, but you know, you probably look talking about the US being more like 40% overvalued.
So, you know, we think even though the Australian markets come down, you know with the US this stage, we think they'll start to disconnect because the Australian domestic fundamentals, you know, potentially get better on the back of cheaper imports from China.
James Dunn: Now as a value manager or a valuation focused active manager, what makes such a fund true to label? What are the defining characteristics of such a style?
Reece Birtles: Yeah, I mean we're a value manager, but we don't hate growth, and we don't hate quality. We love both. What we really do is, you know, value that growth or the value, the quality characteristics of a company.
And so we're looking for stocks that are trading at a discount to an unbiased valuation of future cash flows, and so it's that discipline in the process of focusing on how undervalued a stock is.
And we also think, you know, we're a bit different in terms of we won't take risk all the time.
You know, when there's a lack of opportunities in the market, we'll be more, we'll take less risk, active risk compared to at times when you get dislocations like today, when you know it, it's really worth buying into differentiated contrarian positions.
James Dunn: How do you balance quantitative signals with qualitative judgement when, when you're running your eye over the book or the, or the potential, the short list constantly and looking to identify undervalued or overvalued positions.
Reece Birtles: So, we think, you know, all our true alpha, all our real insights come from fundamental analytical judgement. So it's people understanding how business evolves in the future and what its earnings are going to do. But we're a bit different to some fundamental managers where we're quite numeric.
So, you know, we really look to forecast earnings.
We have a very disciplined valuation approach, very disciplined investment approach where we're balancing value, quality and momentum characteristics on each stock and it's sticking to that process and looking for that distortion between our assessed value and market.
So that's quite numeric in many ways and quantitative, but all the insights and differentiated views really come from the qualitative component.
And it allows us to really measure market opportunity and see what's there today.
James Dunn: It's a concentrated portfolio, so how within that do you manage risk across sectors and individual positions while maintaining conviction?
Reece Birtles: So we're always looking for the degree of opportunity, which we define as the degree of undervaluation compared to the risk, and so we're looking at how volatile we expect the stock to be in terms of its quality, in terms of its debt, in terms of the size of the company.
You know, for two companies with equal opportunity, the riskier one will take a smaller position in compared to the higher quality one, because we don't want anyone's stock to dominate portfolio performance.
We know we want good diversification across the 30 active positions that we have, and then we're always, we are always looking at the degree of opportunity, so if there is excess opportunity in energy, for example, we'll own more than one company. But if it's only an average opportunity, we might be neutral the energy sector and you know, long one name and short the other.
James Dunn: What role does ESG play in your investment process and, and how has it, if it, if it has influenced your recent decision making, how, how has it done?
Reece Birtles: So, we're what you call an integrated ESG manager – so in assessing the quality and the cash flow potential of the company will take ESG issues into account in terms of, you know, we look for the most important sustainability risks for the company.
We have a clear assessment of the governance of the company and how well it's aligned with shareholders and licenced to operate right. We want a bigger return for riskier companies and we also want to engage with companies to get it in to improve.
A really, probably, good example in recent years has been Medibank, you know, with that cyber-attack, and you know, our assessment was that they were a good company, they were unlucky in terms of the cyber-attack. That wasn't because they were bad and that they had a good relationship with their customers and they had a good purpose and we really believed that they could work through that process. So for us, the ESG event was a buying opportunity at a discounted price.
And I think, you know, the companies really executed since that time to demonstrate the benefit of knowing this is a good ESG company compared to other ones that are not really looking after their customers.
James Dunn: Reece, as markets evolve, how do you see the relevance of value investing changing if at all, and where do you see the greatest opportunities ahead?
Reece Birtles: So we argue that in in some of the big macro factors in the last 20 years and made it difficult for value investors. So we've been in an environment where the bond equity return correlation has been negative. That's very unusual.
Prior to 2000 it didn't exist that way, and we've also been in a situation where bond yields have been less than nominal GDP, you know, effectively free money environment in that those two factors have made it quite hard for active managers in general, but especially for valuation, the valuation premium really hasn't been delivering excess returns.
So we think, you know, we've seen in the last two years that equity bond correlations gone returns, positive trade wars and the like is likely to make bond yields higher compared to nominal GDP, and so that now money costs something. So, people are going to differentiate between good and bad in terms of valuations, so we think that's important.
But most importantly, you know, regardless of whether those causes are, are, are correct, we measure how big the spread is between how cheap the portfolio is compared to the market, and on average it's about 20 to 25% cheaper than the market.
But today it's like 40%.
You know, it's similar to tech bubble, 40%, it's similar to GFC, it's similar to COVID. This is one of the biggest distortions between the cheap stocks in the market and the rest.
But what's different is today is those names are low beta, high quality names, whereas in GFC, in COVID, you're in a crisis, the cheap names were risky, whereas in a tech bubble, today the, the cheap names are actually the high quality companies.
So we expect just like in the 2000s, value investing, excess return premium for lower risk, you know, the perfect combination, whereas people have not seen that for over 15 years.
James Dunn: Reece Birtles, Chief Investment Officer at Martin Currie, soon to be rebranded as Clearbridge,
thanks very much for your time here today at the Inside Network Equities and Growth Symposium.
Reece Birtles: Thanks, James.
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